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Lecture 6

COMMERCE 1AA3 Lecture 6: Chapter 6


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Firat Sayin
Lecture
6

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Chapter 6: Inventory & Cost of Goods Sold
Income Statements
Merchandising company
o Sells inventory
o Has COGS and gross profit
Service company
o Doesn’t sell inventory
o Doesn’t have COGS and
gross profit
Balance Sheets
Merchandising company
o Has an inventory account
Service company
o Doesn’t have an inventory
account
Merchandise Inventory
Example
Furniture store
o Has 3 chairs $300 each
o Sells 2 chairs $500 each
Balance Sheet
o Reports 1 chair $300
Income Statement
o Reports cost of 2 chairs sold
$600
Identifying Inventory
Inventory
o Cost of inventory on hand
o Asset on the Balance Sheet
COGS
o Cost of inventory sold
o Expense on the income
statement

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Sales Price VS Cost of Inventory
Sales revenue
o Based on sale price of inventory sold
Cost of goods sold
o Based on cost of inventory sold
Inventory
o Based on cost of inventory on hand
Gross Profit/Margin
o Sales revenue less COGS
Number of Units of Inventory
Determined from accounting records
o Evidence Physical count of the goods at year end
Consigned Goods
o Doesn’t include inventory held for another company
o Doesn’t include goods held on consignment
In Transit Goods
o Depends on shipping terms
Shipping Terms
FOB Shipping Point
Item leaves sellers place of business
o Legal title passes to purchaser
Purchaser owns good while in transit
o Included in purchasers inventory count
o Purchaser pays transportation costs
FOB Destination
Items arrive at purchasers receiving dock
o Legal title passes to purchaser
Seller owns goods while in transit
o Included in seller’s inventory count
o Seller pays transportation costs
Inventory Accounting System
Perpetual Inventory System
Used for all types of goods
o Keeps a running total
o Inventory counted at least once a year
Periodic Inventory System
Used for inexpensive goods
o Doesn’t keep a running total
o Inventory counted at least once a year
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Perpetual Inventory
Bar codes on products provide information to record
o Record sale of item
o Update inventory record
Two entries required for each sale
o Debit asset received and Credit revenue
o Debit COGS and Credit inventory
Recording Inventory
Example Journal
Inventory purchased on account
o Debit inventory $560,000
o Credit A/P $560,000
Inventory sold on account
o Debit A/P $900,000
o Credit sales $900,000
Record COGS
o Debit COGS $540,000
o Credit Inventory $540,000
Example T-Account
Inventory T-Account
o Beg. Inv. $100,000
o + Purchases $560,000
o - COGS $540,000
o End. Bal. $120,000
COGS T-Account
o + COGS $540,000
Example Financial Statement
Example Cost of Net Purchases
Purchase price of inventory $600,000
o + Freight cost $4,000
o Purchase returns ($25,000)
o Purchase allowances ($5,000)
o Purchase discounts ($14,000)
Net purchase of inventory $560,000
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